|Event Review: London seminar on prospects for Brazilian wind energy - with a focus on Bahia|
The 'Brazil: Wind Energy Opportunities' seminar, a warm-up session ahead of BWEC 2012 (which will take place in São Paulo on 2-3 April), was held in London on 8 March. The event was organised by Cleantech Investor and supported by TheCityUK and Bird & Bird. An introduction by Matt Bonass (a Partner at Bird & Bird, which kindly hosted the event) was followed by presentations from Colin Johnson (Grant Thornton/The City UK), Anne McIvor (Cleantech Investor), Miguel Ferreira (Megajoule) and Paulo Roberto Britto Guimarães (from the Government of the State of Bahia).
The session provided a host of valuable insights into the potential for the wind sector - both project development and manufacturing - in Brazil. Not least amongst the messages was the sheer scale of the opportunity in Brazil - which, as more than one speaker emphasised, is more comparable to a continent than a country. Brazil has a large economy: the event took place during the same week it was confirmed that the Brazilian economy has overtaken the UK to rank number six in the world - with GDP of US$2.44 trillion in 2011. This large economy has a substantial energy market: Colin Johnson of Grant Thornton/TheCityUK quoted one statistic in which Brazil ranks as the third biggest electricity market in the Western Hemisphere. And that market is growing fast. According to Miguel Ferreira (quoting statistics from EPE), energy demand is growing in Brazil at a rate of 3,200MW/year.
The existing energy matrix in Brazil includes a high proportion of renewables (45% of energy comes from renewables compared with the world average of 14%, according to Johnson's sources) - mostly in the form of hydro. Miguel Ferreira, founder of Megajoule (a wind energy consultancy), emphasised the strong seasonal complementarity between wind and hydro - a factor which bodes well for the development of wind energy in the future.
Another driver behind the wind power sector in Brazil is a lack of other options. Possible future constraints on new energy generation capacity from sources other than wind, mentioned by the speakers, included:
1. Hydro: Environmental question marks over the future of further hydro electric developments, such as the giant Belamonte project in the Amazon region, and an ongoing debate over 'neighbouring hydro' (imported from countries such as Argentina and Peru).
2. Nuclear: Brazil has a nuclear programme but, as Colin Johnson mentioned, there are further concerns about the Angra III nuclear project in terms of its safety (given the older design being used and landslide concerns at the location itself) which have provoked opposition from Greenpeace. This may make its completion less likely, particularly as a significant part of its financing is from the German development bank; the Greenpeace concerns may make that difficult politically.
3. Natural gas: Prices of natural gas are set domestically in Brazil and are higher than in some other markets (notably much higher than in the US).
The conclusion from all of the speakers was that the outlook for wind in Brazil is extremely promising and that Government policy is very supportive of the industry. That support is channeled largely through the state-owned Brazilian Development Bank, 'banco nacional do desenvolvimento' or BNDES. BNDES, as Colin Johnson pointed out, is the world's largest development bank - larger than the World Bank. It has played a central role in kick-starting the Brazilian wind energy industry: according to Johnson's sources, of R$5.1 billion invested in wind in 2011, R$3.4 billion was financed by BNDES.
One key aspect of the Brazilian wind energy market is that there are no longer any overt subsidies (such as feed-in tariffs) provided to wind power. Prices for wind energy contracts are established through an auction system. Although there are dedicated wind auctions, wind also competes head-to-head with fossil fuel (natural gas) and other renewable energy sources (notably bagasse - waste biomass from the sugarcane/ethanol processing industries) in open auctions. In landmark auctions held in August 2011, the price contracted by wind energy projects - on average - fell below the equivalent price for natural gas, implying wind power at 'grid parity': a world first (see 'Brazilian Wind Power Reaches Grid Parity', published in Cleantech magazine last year).
Miguel Ferreira confirmed that the ability of project developers to enter bids at low levels in the Brazilian wind auctions is often the result of hard bargaining with equipment producers. He explained that bartering on prices for turbines takes place even as the auction is in progress. Turbine manufacturers have been suffering over the last year or more, which may have worked in favour of the Brazilian project developers. (With traditional markets such as the US and Europe in recession, turbine manufacturers needed to focus on Brazil and other fast growth markets to maintain their market presence - even at prices below what they might have preferred.) The speakers confirmed that prices contracted for wind energy are now stabilising, with no further price falls (on average) seen in subsequent auctions.
Any concerns about the workings of the auction system from the largely British audience (some of whom have memories of failed wind auction systems, when projects were contracted at low prices, but were never built) were allayed by the speakers, who explained that the Brazilian auction system imposes heavy penalties on a developer who fails to deliver energy on time and as promised. Tough requirements are also imposed upon developers before a project can qualify to enter the auction. Paulo Guimarães pointed out that the State of Bahia works closely with developers to help them meet environmental and other permitting requirements.
The Federal Government recently decided to extend to three years the length of time required for wind resources to be measured at a site before a project is eligible to enter the auction. According to Guimarães, the State of Bahia was instrumental in negotiating that the new policy shouldn't come into force until the end of 2012 - to ensure that some of the projects planning to participate in the next auctions in Bahia will still qualify. Despite that extension, there are bottlenecks in the process of approvals to enter the auctions (notably in the area of environmental permitting). This has resulted in the postponement of the auction which had been scheduled for the end of March until later in the year.
A second important aspect of the Brazilian wind market is that the development of wind power forms part of an integrated Government policy on both energy and economic development. Wind is not considered to be just a crucial future source of energy: it also forms an important plank of Brazilian economic development policy, which focuses on the scope for wind power to contribute to the economic development of the (less developed) North East of the country.
Wind is contributing to economic development in the North East of Brazil in two ways:
1. Wind project development - a focus on the 'semi-arid' regions in states such as Bahia (which was discussed in depth at the event by Paulo Guimarães) and Rio Grande do Norte is important (these regions happen to have great wind resources - but they are also relatively poor and the introduction of wind energy has economic benefits).
2. The emergence of wind equipment manufacturing hubs in states including Bahia, Pernambuco and Ceara - with a focus on the creation of manufacturing jobs in the North East of the country.
BNDES, the Brazilian Development Bank, is central to this 'joined up' policy. Brazil - unlike China - doesn't impose any legal restrictions on the source of the equipment which can be used in its wind power industry. However, for a project developer to benefit from loan finance at favourable rates, local content requirements are imposed by BNDES.
This subtle policy - combined with the practicalities of manufacturing locally, given the distances involved- has encouraged a host of equipment manufacturers to set up shop in Brazil. The emergence of Bahia as one of several manufacturing hubs was discussed in depth at the seminar by Paulo Guimarães. His presentation was timely, in the week that GE confirmed it will become the third turbine manufacturer to set up in the State of Bahia (and predicted 25% growth in its revenues from Latin America, which the US giant expects to outstrip China in its results in 2012 - albeit overall, not just wind!).
GE is set to join Alstom and Gamesa in the Camaçari industrial complex in Bahia, where wind equipment manufacturing companies benefit from a host of favourable conditions ranging from reduced rents and tax exemptions to favourable loan rates for the construction of manufacturing plants, from both BNDES and the regional development bank of the North East of Brazil, Banco do Nord Est (BNB).
The Camaçari complex (which is also a major petrochemical complex and is the base of a large automotive manufacturing industry) is also the base for manufacturing plants owned by tower manufacturer, Torrebras (WINDAR Renovables), steel manufacturer Dacero (which supplies towers) and a blade manufacturer.
Paulo Guimarães spoke in depth about the potential for wind project development in the State of Bahia - which is comparable in size to France. The economy of Bahia is the largest in the North East of Brazil and ranks number six overall in the country. There are 1,563MW of wind projects under development in Bahia and, according to Government of Bahia statistics, a further 1,345MW of capacity is at the point where it is ready to sign contracts, another 4,634MW of projects are under evaluation in the state, and there are preliminary studies relating to projects with projected capacity of a massive 8,900MW in Bahia.
Overall potential for wind energy in Brazil was estimated, by Miguel Ferreira, to be between 300GW and 350GW. Ferreira quoted the 2001 Brazilian wind atlas, which estimated a potential of 143GW - but observed that the 2001 numbers are considerably out of date, taking into account updated methodologies. The potential for the development of specific technology, tailored for the Brazilian market, was mentioned (examples include the very high altitude wind - tall - towers, which have considerable potential in some regions in Brazil (including Bahia).
In terms of returns being achieved by investors in projects in Brazil, numbers are difficult to come by. Returns are clearly influenced by the interest rates on loans and vary according to the region. In the past, BNB provided loans at even lower rates than BNDES for projects in the North East. However, it withdrew from the project financing market last year. One option under consideration (according to Paulo Guimarães) to encourage the development of the market in the North East of the country in the future is regional auctions. However, no decision has been made on that at this stage.
Since the auction system permits a wind project operator to sell energy at prices under a very long term contract of 20 years, key investors are - not surprisingly - utility companies and long term investors who require a stable rate of return. However, it was pointed out that there are many examples of more entrepreneurial developers entering the market, establishing projects, and selling out at a later stage to larger entities, or investors with a longer term risk/reward profile. This phenomenon explains a rise in merger and acquisition activity in the Brazilian wind project development sector over the last year or more - with the utility companies prominent amongst the buyers.
One point highlighted in London was that the trends in investment and finance are changing in Brazilian wind project development. The private sector banks look set to play an increasingly important role in the financing of wind energy in the future: the role of BNDES will decline as the industry matures and reaches critical mass. The implications of this trend for investors in the sector is one of the aspects which will be covered in more depth at BWEC 2012 on 2-3 April.
The four speakers at the London seminar will participate in the BWEC 2012 conference on 2-3 April, alongside a host of other experts in wind energy in Brazil. Day 1 will focus on themes including financing and investment in wind energy and the role of wind in Brazil's overall energy mix. Day 2 of the conference will involve presentations by key Brazilian 'wind states' - including Bahia, alongside other major states such as Rio Grande do Norte and Ceara.
Speaker presentations from the London seminar, Brazil: Wind Energy Opportunities, may be downloaded from the links below:
- Partner, Bird & Bird
Matt introduced the speakers and welcomed the delegates to the event.